If you have bad credit, applying for financing can be an exercise in frustration. Fortunately, some lenders specialize in loans for people with bad credit.
While there’s no such thing as a “guaranteed” installment loan, some loans are easier to qualify for than others. You may also be able to use a credit card to finance a big purchase.
Best “guaranteed” installment loans for bad credit
An installment loan is exactly what it sounds like. The bank gives you a lump sum of cash upfront, and you pay it back in a fixed number of installments—usually monthly.
Common installment loans include financing for cars and furniture. A mortgage is another type of installment loan. The fixed term and set borrowed amount of an installment loan is a contrast to a credit card, which gives you the flexibility to “borrow” more if you need it.
Installment loans can be short-term or loan-term. For example, you might take out a short-term personal loan you pay back over 12 months. A mortgage, however, can extend over a 30-year period.
Pros & cons of installment loans
Installment loans have their benefits and drawbacks. Before you sign up, it’s important to understand the potential pros and cons.
Benefits of installment loans
Perhaps the most positive feature of installment loans is predictability. With an installment loan, you borrow a fixed amount and then pay it back over a certain period of time. This can make it easier to fit the loan into your budget.
Drawbacks of installment loans
Installment loans aren’t without potential downsides. Unlike a credit card, for example, you can’t add to your loan if you need additional financing.
Additionally, lenders adjust their interest rates based on your credit score. If your score is low, you’ll pay a higher interest rate than someone with good credit—assuming your score is good enough to qualify in the first place.
Also unlike a credit card, installment loans frequently come with up-front fees, such as application fees and loan origination fees. Some lenders will even assess a penalty if you pay off your loan early.
Top 3 installment loans for bad credit
If your credit score is lower than you’d like it to be, don’t worry. You may still be able to qualify for an installment loan. Some lenders specifically cater to people with less than stellar credit. Here are the top three installment loans to consider if you have bad credit.
#1 — Money Mutual
In business since 2010, Money Mutual has served over 2 million customers. Borrowers don’t actually receive funds directly from Money Mutual. Rather, the site lets you fill out a single application and then matches you with lenders who might be a good fit.
- Get a short-term loan of up to $2,500
- Receive your money within 24 hours
- Fill out a single application form online
#2 — CashUSA.com
CashUSA lets you connect with a network of lenders that accept borrowers with bad credit. You need to earn at least $1,000 each month after taxes, have a valid email address and phone number, and maintain a checking account in your name.
- Loans ranging between $500 and $10,000
- Direct deposit of funds into your bank account
- Get your money as early as the next business day after approval
#3 — PersonalLoans.com
PersonalLoans.com will connect you with lenders offering installment loans starting from $1,000 and going all the way up to $35,000. You can apply online and receive your money as soon as the next business day.
- Get access to lenders even if you have bad credit
- Repayment periods ranging from 90 days to 72 months
- Interest rates as low as 5.99%
Best guaranteed “short-term” loans for bad credit
Installment loans are great when you need to buy a bigger ticket item like a house or car. But what if you need cash for a smaller purchase you’d like to pay off more quickly? This is where a short-term loan can help.
What is a “short-term” loan?
As the name implies, a short-term loan is made to be paid back much faster than a typical installment loan. Repayment terms vary, but most short-term loans are designed to be repaid within 90 days to six months. You may even find cash advance loans with repayment periods as short as one week.
Pros & cons of short-term loans
As with longer installment loans, short-term loans have their own pros and cons. It’s important to get the facts before you decide to take one on.
Benefits of short-term loans
Because short-term loans usually involve smaller amounts compared to installment loans, they’re typically much easier to qualify for. Lenders aren’t taking on as big of a risk, so they might be willing to work with you even if you have bad credit.
Drawbacks of short-term loans
On the other hand, lenders sometimes offset their risk by charging high-interest rates for short-term loans. If you need to borrow a relatively small amount of money quickly, lenders might assume you lack an emergency fund. To protect themselves in the event you default, they hike up the interest rate on your loan.
Short-term loans also tend to have lower borrowing limits than installment loans. If you need to finance an expensive purchase, you probably can’t do it with a short-term loan.
Top-ranked short-term loans
Short-term loans won’t work in every situation, but they can be a big help if you need a lump sum of cash in a hurry and you have the funds to pay it back on time. Here are two good short-term loan options to check out.
#1 — BadCreditLoans.com
In business since 1998, BadCreditLoans.com connects borrowers with a network of lenders that offer short-term loans. Loan amounts range between $500 and $5,000. Repayment terms start at 3 months and extend up to 36 months.
#2 — CashAdvance.com
CashAdvance.com has been around since 1997. Like other loan marketplace sites, it matches borrowers with a range of potential lenders. It’s free to apply using an easy online form. Typical loan amounts range between $100 and $999. Repayment terms vary by lender.
Best Guaranteed “Credit Card” Loans for Bad Credit
While they work differently than an installment or short-term loans, credit cards are another option for financing a big purchase.
Unlike installment loans, which you repay at a fixed amount over a predetermined period of time, credit cards are a form of revolving debt. This means you can “borrow” repeatedly (up to your credit limit) without reapplying.
Pros & cons of “bad credit” credit cards
If a low credit score is making it difficult for you to qualify for an installment loan, a credit card might be a better option. As with installment loans, however, credit cards come with possible benefits and drawbacks.
Benefits of credit cards
Perhaps the biggest advantage of having a credit card rather than a loan is the flexibility credit cards offer. Unlike a loan, you can continue borrowing if you need more financing.
With a credit card, you can also pay as little or as much as you want toward your balance. As long as you make the minimum payment each month, you can keep your account in good standing. This is different from an installment loan, which has a fixed monthly payment.
Drawbacks of credit cards
While a credit card can sometimes be a good substitute for a loan, it’s important to be aware of the potential downsides.
Although it might be easier to qualify for a credit card with bad credit, you can expect to pay more in interest. Credit card lenders reserve their best interest rates for customers with excellent credit.
Also, credit cards on average tend to have higher interest rates compared to installment loans. This is because most installment loans are secured by collateral, such as a house or car. By contrast, the majority of credit cards are unsecured.
Additionally, the majority of credit card companies charge a fee for cash advances. This can make it difficult if you want to use your card to access a lump sum of cash rather than charging a purchase to your card.
How to compare loan terms
When you’re trying to decide between various loan options, it’s easy to feel confused and overwhelmed. Confronted by a dizzying array of repayment terms, interest rates, and fees, you might struggle to keep it all straight. Here are the important points to pay attention to.
How long will it take you to repay the loan in full? In general, a shorter repayment period is likely your best option — with some exceptions if you’re taking out a mortgage.
With a shorter repayment period, you can probably expect to pay a higher monthly payment, but you’ll save a lot in interest compared to a loan with a longer term.
Arguably, the most important point to consider when exploring loan options is the interest rate, which is called the annual percentage rate (APR). Is the APR fixed or variable? If you’re applying for a credit card, are you confident you can resist the temptation to overspend — and rack up more interest as a result?
How much will you pay each month? With an installment loan, this is a fixed amount, which makes it easy to budget. If you’re thinking about a credit card, make sure you can afford to pay more than the minimum payment so you don’t get stuck in a situation of snowballing debt.
What does “guaranteed credit” mean?
If you’re shopping for a loan with bad credit, you might come across offers that purport to “guarantee” approval regardless of your credit score.
In truth, no lender can give you “guaranteed credit” or approval. While a lender might pre-qualify you based on the preliminary information you give them, final approval depends on your credit score, income, and other factors.
“Guaranteed credit” offers are common among auto loans, and particularly with auto dealerships that handle their own financing in-house.
These offers aren’t necessarily scams, but it’s important to take them with a grain of salt — and to review any loan offers with an extreme eye for detail.
Many “guaranteed credit” deals involve extremely high-interest rates, so be wary about signing the dotted line. It’s always worth shopping around to see if you can qualify for a more competitive rate elsewhere.
Understanding your credit score
When you shop for an installment loan, short-term loan, or credit card, lenders will want to know your credit score. Banks and other lenders use your score to determine what kind of credit risk you pose.
Your credit score is a snapshot of your past credit use in the form of a three-digit number. If your score is low, it’s a sign you’ve had difficulty with credit in the past. A low score can also indicate that you have little or no credit history.
By contrast, a high score means you have a history of responsible credit use, which means you’re less of a risk to potential lenders. This makes you a more attractive customer, and banks and credit card lenders will offer you lower interest rates in a bid to earn your business.
Credit scoring models vary, but the general range starts at 300 and goes up to 850. Here’s how the scores break down according to MyFICO.com:
- 800 and above – exceptional
- 740 to 799 – very good
- 670 to 739 – good
- 580 to 669 – fair
- 579 and lower – poor
Your credit score is based on your credit report, which is a comprehensive record of your past credit use.
When you apply for a loan or credit card, lenders review your credit report and credit score to decide whether to lend you money/approve your card. They also use this information to determine what kind of terms and interest rates to offer you.
What is considered “bad” credit for personal loans?
Because personal loans are almost never secured with collateral, they can be tough to get if you have bad credit.
What constitutes “bad” credit varies from lender to lender, but a score of 550 or below is generally too poor to qualify for a personal loan. According to MyFICO.com, 61 percent of people with a credit score of 579 or lower end up delinquent.
If your score is hovering around 570 or below, it’s probably better to work on rebuilding your credit rather than trying to qualify for a loan. Once you improve your score, you can qualify for better loan terms and interest rates.
Where can you look for a personal loan with bad credit?
If you don’t have time to wait for a loan, there are plenty of places to look for financing.
- Banks – You might be able to find a bank that will offer you a loan with bad credit. You’re likely to have more success if you already have an established relationship with the bank you’re trying to work with.
- Credit unions – In many cases, credit unions are more willing to work with a borrower with bad credit, especially if you’re already a member.
- Online – If you’re struggling to find a local bank or credit union that will work with you, consider expanding the lending pool by looking online. Loan aggregator sites allow you to search for the best terms and interest rates across numerous lenders.
How much do loans with bad credit cost?
If you have bad credit, you should expect to pay more in interest on a loan, with your credit score being the primary factor in what kind of interest rate you’ll receive.
As you compare loans, it’s helpful to use an online loan calculator to get an idea of how much you’ll pay overall. For example, this basic loan calculator from Town & Country Federal Credit Union lets you quickly plug in numbers to see how much your loan will cost you.
If you wanted to borrow $5,000 at 22 percent interest over three years, you would pay $6,874 over the life of the loan, with monthly payments of $190.95.
Keep in mind, however, that you’ll likely need to account for additional costs, such as loan origination fees and application fees.
Why you should be wary of payday loans
If you’re shopping for a short-term loan with bad credit, you might see advertisements for payday loans. In general, it’s best to avoid these types of loans, as they can be a gateway to out-of-control debt.
According to a report from the Consumer Financial Protection Bureau (CFPB), over 80 percent of payday loans are rolled over to a new loan. In other words, the overwhelming majority of payday borrowers don’t pay off their loans. Instead, they extend the loan into a new one.
The CFPB also reports that 15 percent of new payday loans are followed by a “loan sequence” that’s 10 loans long. This means these borrowers end up borrowing and reborrowing at least 10 times in a row.
How you can use a personal/installment loan to build your credit
If your credit score is lower than you’d like it to be, an installment loan may actually help improve it. Here’s how:
- Improve your payment history – Making regular, on-time monthly payments on an installment loan can go a long way toward improving your payment history on your credit report. Your payment history accounts for 35 percent of your credit score, making it the single most important factor for your score. A history of on-time payments shows creditors you’re a reliable borrower who can be trusted to pay your bills as agreed.
- Help your mix of credit – An installment loan can also add diversity to the types of credit accounts you carry. Lenders like to see a mix of credit, and this factor accounts for 10 percent of your credit score. If you only have credit cards right now, adding an installment loan could boost your score.
- Lower your credit utilization – After your payment history, your credit utilization is the most important factor in determining your credit score. It makes up 30 percent of your total score, so a poor utilization rate can make a big difference.
Keep in mind that applying for an installment loan will likely count as a “hard inquiry” on your credit report, which can negatively affect your credit score. This happens when lenders pull your report after you submit a loan application. While one or two hard inquiries aren’t likely to drop your score, a flurry of hard inquiries definitely can.
This is why you should try to limit the number of applications you fill out. Take your time shopping around and comparing loans, then only apply for the ones you think you have a good shot at qualifying for.
3 tips for improving your credit score going forward
If bad credit is holding you back, the good news is there are proven strategies for improving it. Bad credit isn’t a permanent thing. In fact, working to improve your score can give you a real sense of accomplishment as you see your score go up.
If you’re committed to improving your financial health, you can boost your score much faster than you might think. Here are three tips to consider if you’re interested in building or rebuilding your credit as quickly as possible.
1. Always pay your bills on time
Many people don’t realize just how much a late payment can hurt your credit score. Even one or two 30-day late can drop your score considerably.
Remember that your payment history makes up 35 percent of your credit score, which is why those late payments make such a big dent.
2. Borrow someone else’s good credit
If you have bad credit or little credit history, you can improve your score by piggybacking on someone else’s. You accomplish this by asking them to add you as an authorized user on their account—typically a credit card.
Once you’re an authorized user, you’ll get credit for your on-time monthly payments. Just make sure the credit card lender reports authorized user activity to the credit bureaus, as not all of them do.
3. Get a secured credit card
One of the frustrating things about credit is you need good credit to get credit in the first place. If you’re just starting out, or you’re struggling to rebuild your credit score, it can be almost impossible to convince a lender to trust you.
This is where a secured credit card might help. Secured credit cards are designed specifically for people who can’t qualify for a regular card. Lenders who offer secured cards market them to people who need to build or rebuild credit. This makes them much easier to get than a traditional card.
With a secured credit card, you give the lender a sort of down payment as collateral. In many cases, this down payment—typically a couple of hundred dollars—is also the card’s credit limit. As you charge purchases and pay them off, the credit card company reports your positive payment history to the credit bureaus.
Many secured cards give you the option to roll your card over to an unsecured card with a higher credit limit after a certain period of time. That way, you don’t need to worry about re-qualifying when you’re ready to graduate to a regular credit card.
Bad credit can make it more difficult, but not necessarily impossible, to qualify for an installment loan. If your score is low, you should be prepared to pay more in interest. For those with truly poor scores, it’s usually best to work on improving your credit score before taking out a loan.